Find Us

The blockchain and its impact

A blockchain is a distributed and continuously growing database that spans thousands of nodes, and that is comprised of any number of building “blocks” that hold transaction information, linked together in a secure way to ensure information integrity. Since every link between any two given blocks uses public key cryptography, the longer the chain the higher the security, as any tampering of data will alter the hash value of the block, causing inconsistencies down the line that will prevent accessing other portions of the chain.

Most people have heard of Bitcoin, the online virtual currency that enables financial transactions with no “traditional” currencies involved. Bitcoin is the visible layer of the process. Most end users don’t need to peel it and peek into its inner layers. But the one technological innovation that sits at the core and enables Bitcoin to function is the blockchain.

With blockchain technology we a distributed ledger recording transactions in thousands of computers worldwide. It insures the uniqueness of a particular digital asset and solves the problem of double spending, that is, using the same asset more than once.

A blockchain consists of two different components, blocks and transactions. Blocks contain a set of transaction hashed and encoded in a Merkle tree, and includes the hash from the previous block, thus creating a relation between any given pair of nodes, which are in turn related to their respective adjacent nodes. This means the information can be retraced all the way back to the original block.

A convoluted way of explaining a blockchain is to say that it is a hash chain inside another hash chain. As you might divine from the mere sound of the previous sentence, this multilayered entanglement makes hacking a rather remote proposition.

One critical concept in the blockchain is consensus. A consensus mechanism is a protocol used to insure the integrity and verifiability of a transaction or group of transactions. Consensus is necessary before a new block is appended to the chain, and it is the safeguard of all the information contained therein.

Miners are people who compete to validate blocks and solve related problems, thus creating this consensus. There are different ways to achieve this, but it typically involves verifying the validity of transactions, inserting the header of the most recent block into the new one as a hash, and solving what is known as the Proof of Work Problem. In simple words, the PoW problem entails finding a hash number that is smaller than a given target value, which requires computing power and time. This is why miners collect a fee for every block they “solve”.

While the most famous and widespread application for the blockchain is cryptocurrency, especially Bitcoin, there are, in fact, many more kinds of transactions and facts that can be stored in it and that would benefit from its inherent characteristic. A small (and by no means complete) list would look like this.

Property ledgers

Medical records

Criminal activity records

“Persistent digital ID and persona”, involving a wide range of facts about someone

Intellectual property rights

Vote counts and election results

Smart contracts (automated escrow or rule-based payments)

Pretty much everything, or at least everything that requires integrity validation.

The blockchain opens up a slew of new of possibilities for the future of information management, asset management, and the way that people do business. The potential for a positive impact is enormous, but there are some pitfalls that might preclude this technology from living up to its ideals.

Some of the most interesting characteristics of the blockchain include:

Decentralization

Decentralization means that you no longer need a coordinating party to orchestrate and regulate transactions. This can create more nimble markets and environments, where the decisions of agents can be implemented with little to no delay, as they need no approval or sanction.

Elimination of overhead (middleman)

The coordinating party mentioned above tends to be in a position of power with respect to individual agents (such as the case of a bank overseeing monetary transactions), which allows it to impose restrictions and levy fees that may not be convenient, or even fair, to individual agents. Eliminating this middleman creates cheaper and more liberalized access to assets.

High potential for integration (e.g. self-paying invoices)

Newer implementations of blockchains, sometimes referred to as “blockchain 2.0” have significant capabilities for automated interactions with systems and agents. Mechanisms such as smart contracts enable the implementation of self-paying invoiced (triggered when a specific condition takes place) or automated escrows.

Universal access (financial and otherwise)

As of now, there are no regulations that limit access or restrict participation in blockchain-supported transactions, or that endow special privileges to certain specific agents. It is a democratic process and a level playing field.

“Incontrovertible truth” or information that can’t be changed

The blockchain is hailed as a virtually unbreakable information storage and query system, with only an infinitesimal risk of corruption of data, fraud, theft, or inconsistency. If this promises hold true over time, this is the single most significant attribute of the technology.

As we mentioned, there are also some question marks that need to be considered, such as:

Volatility

The subjective valuation of blockchain assets is more volatile than traditional assets. Therefore, investing money in them carries along a more significant risk. This is not a property of the blockchain itself, but rather of the services built on top of it. It’s particularly apparent in cryptocurrency.

Security concerns

While information security is the ostensible strong suit of the blockchain, there is always a danger of overconfidence in its robustness. If we “bet” on the unassailability of this technology without taking precautions, a potential future breach of security would leave no mechanism of defense standing.

Centralization by takeover

The blockchain is decentralized by design, and no single entity can control it. However, a small army of miners is at work guarding the integrity of the data in each block, and it is not inconceivable to imagine that some external party with a strong interest in accessing or controlling the information contained therein might subvert this distributed network, by either recruiting or replacing the people involved.

Gigantic centralized database

This relates to the two previous points. There is an enormous database (or a collection of them) that stores financial information, medical history, identity information, credit history, property ledgers, and everything else. If it were subject to a malicious attack or organized takeover, the “price” to pay for that information leak could be onerous indeed, even catastrophic.

As with all nascent technologies, there is no certain way of predicting if it will live up to its touted potential or fall short on its promise. But, as the efforts of several major companies indicate, there is little doubt it will have an important spot in the arsenal of tools that will propel technology within the next few years and beyond. As always, it will be fun to watch were it leads.